The Law Firms that Dominated Cannabis M&A in 2018 – And Their Views on the Farm Bill

From the Tilray IPO to Constellation’s big investment in Canopy Growth, cannabis deals struck a record level in 2018, making a hefty workload for investment bankers. But given the legal complexity of cannabis, it was also critical to hire the right law firm.

At the top of the list – by a wide margin – was Toronto-based Davies Ward Phillips & Vineberg LLP, which worked on all three of the largest M&A transactions and commanded an impressive 41% market share, according to Dealogic. Those deals included Constellation’s $3.9 billion investment in Canopy Growth, Aurora Cannabis’s $2.5 billion acquisition of MedReleaf, and Altria’s $1.8 billion investment in Cronos.

Why is Davies a go-to firm for cannabis? While the firm has a healthy overall North American M&A business, on par with the likes of Ropes & Gray and Sidley Austin by Dealogic rankings, it has a sharp focus on marijuana. And Canada has been faster to deregulate marijuana than most other countries, which has led overseas buyers to seek out investments and acquisitions there.

Davies partner Patricia Olasker, whose expertise includes cannabis law, believes Wall Street will enjoy more cannabis activity in years to come. And the deal characteristics will evolve. “In the early days of M&A in this nascent industry, we saw simple consolidation – licensed producers acquiring licensed producers — to get scale, access to genetics and international relationships,” she said to IPO Edge. “The current and future wave is a diversification and/or defensive play by players outside the industry – beverage companies, tobacco companies, pharmaceutical companies.”

There could be investments from buyers who haven’t yet touched the industry. “Don’t be surprised to see consumer packaged goods companies and national retailers entering the space through acquisitions and investments,” she said. “And what our clients are telling us is that now that cannabis company valuations are coming down and the effect of mediocre management and poor governance is being exposed, expect shareholder activism to follow.”

Thursday’s passage of the Farm Bill, which deregulates hemp and associated CBD products, could trigger dealmaking right away. “With the seemingly imminent de-scheduling of hemp from the U.S. Controlled Substances Act, we expect to see Canadian licensed producers put in motion robust M&A and investment strategies in the U.S. hemp-derived CBD market, with an eye towards the eventual relaxation of cannabis laws many expect to follow,” she says. (Ms. Olasker also published a memo on the subject, available here.)

One of the preeminent cannabis attorneys in the U.S., Joseph A. Bondy, says that the Farm Bill passage will herald more activity – much more if marijuana and THC become legal in more U.S. states or federally. “With hemp’s federal legalization and the inevitability of recreational legalization, larger corporations are entering the cannabis space,” he said in an interview. “Throughout the country, legal cannabis companies are facing, on the one hand, tumbling flower prices and a glut of supply, and, on the other, a prospect for acquisition by larger players for a variety of reasons—existing IP and plant genetics, production techniques, product lines, and clientele, for example.”

There is another world of ancillary cannabis industries that have seen M&A in recent months. High Times, which is raising up to $50 million in a Regulation A+ IPO, has made multiple acquisitions this year. Earlier in December, it bought Buyers Industry Guide, owner of the BIG Show industry conferences, which gather twice annually in Miami and Los Angeles with over 10,000 industry guests annually.

“There are some excellent acquisition opportunities for those who are in the know,” Mr. Bondy said.